With so much volatility in the mortgage market, you may be tempted to refinance your loan to another lender that offers better rates or features. But before you sign anything, read on for a word of caution...
Medine Simmons from MF Simmons Mortgage Broking says refinancing your home loan can be a stress-free, painless experience – provided you don’t make one of these costly mistakes.
Screw up #1: Taking out another loan
Taking out a personal loan or car loan just before you refinance your mortgage can affect your loan application more than you think. “Personal and car loan repayments are higher than your home loan because you pay them off faster, over three or five years, not thirty years like your home loan,” Simmons explains. “So taking out a new personal loan before you refinance may mean that you can no longer show serviceability – in other words, the ability to repay – for your refinance. If you can’t show serviceability, the bank will say no!”
Screw up #2. Applying to lots of banks
Every time you apply to a bank, it’s listed on your credit history. “If lenders see too many applications it starts to look suspect to them. In bank speak, it affects your credit score,” Simmons says. Only apply to a bank if you’re reasonably sure that you’re going ahead, as a bad credit score means the bank could decline your application.
Screw up #3. Applying too soon after starting your business
The bank needs to see two full years worth of tax returns if you have your own business, which means if your business is new, you’ll have to wait at least two years before you apply. “High start-up costs may mean that you even need to wait three years, so don’t rely on refinancing in the first three years of starting your own business,” Simmons says.
Screw up #4. Failing to think ahead
“The most common way to screw up refinancing is by not thinking far enough ahead,” Simmons says. She recommends that you consider any potential life changes over the next four years before you begin shopping for a new loan. “For instance, you might want to take a career break for six months while you have a baby, so you need to look for a repayment holiday feature in your new loan,” she explains. “Or, if you think you might move house and take your loan with you, you’ll need a portability feature.” By thinking forward, you can look for a product now that accommodates your future needs.
Screw up #5. Rushing your cost-benefit analysis
You need to make sure the savings you make by refinancing outweighs all of the expenses involved. Bank costs include the discharge fee from your existing bank (these often apply if you have a loan for less than four years), application costs of your new bank, and you may have government registration costs to pay as well. “Really, there’s no point in refinancing to save $300 per year if the total costs are $2,000, because you’ll need to keep the loan for at least seven years before you benefit,” Simmons says. “But if you achieve a $3,000 saving, you’ll be in the black after as little as eight months. Look for benefits after a maximum of two years’ costs before you go ahead with your refinance.” Most banks offer web calculators to work out these costs, or ask your mortgage broker to do a calculation for you.
Screw up #6. Cross collateralising when you don’t need to
This is where the bank gives you money and you give them the titles to both your home and your investment property. “The bank will ask you to give them both because it’s in their best interests, but you may not need to,” Simmons says. “Sometimes it is required, and other times banks do it because it’s the best thing for their risk management. Don’t be shy about asking your bank or mortgage broker if cross collateralising is really necessary.”
Screw up #7. Failing to consider loan flexibility
According to Simmons, most borrowers are so focused on securing the cheapest rate that they don’t build enough flexibility into their loan. “By flexibility, I mean the loan’s ability to change as you change,” she says. “For instance, today you might be just making the mortgage payment and not have anything left over. However tomorrow, you might get a new job with a nice pay rise, so you’ll require an offset account. How frustrating if your loan doesn’t allow for one, and because it’s been less than three years since you obtained the loan, it’s going to be impractical and expensive to refinance again?” Simmons suggests that you consider flexibility features you may need now and in the next few years, so you can avoid costly multiple loan applications.